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Why Should Government Not Interfere With Independence of RBI? There is a need for further raising the repo rates / policy rates


Now it has become public that government is using various tactics to pressurize RBI Governor to stop increase in policy rates.  AllBankingSolutions is of the view that a wrong precedent is being set up by government.  There are number of reasons why there should be an increase in policy rates at this stage.


There is a no doubt that the issue of raising the policy rates in the forthcoming mid-quarter monetary policy review on Friday the 16th September, 2011, needs to be discussed at various levels as the change or no change in the policy rates have implications for the Indian economy.   However, the news that government is pushing ahead and trying to put the RBI governor in corner and concede their demand to put a halt to raising the policy rates, is worrisome, and will be a blow to the independence of RBI.  Although, the final call will be taken by RBI (may be under pressure from Government), we at AllBankingSolutions feel that there is a need for raising the repo rate further by at least 25 bps, owing to following factors:-






Thus, there is a strong need for an independent review of the policy rates by RBI and ensure that inflation is checked by increasing the policy rates and ensuring that banks actually initiate steps so that interest rates move as desired by RBI.  It has been seen that RBI's signals are frequently ignored by Banks and no effective steps are taken by them.   Government needs to ensure that interests of the poor and middle classes is also watched, as if negative returns from bank savings continue, the growth in savings will be hit which will ultimately hit the growth of the economy.  

Therefore, let RBI take an independent view.